A general view of houses in the town of Vik in southern Iceland.(Reuters/ Ingolfur Juliusson) / Reuters

Iceland’s government has announced that it will be writing off up to 24,000 euros ($32,600) of every household’s mortgage, fulfilling its election promise, despite overwhelming criticism from international financial institutions.

The measure was introduced by the country’s prime minister,
Sigmundur David Gunnlaugsson, the leader of the Progressive Party
which won the late-April elections on a promise of household debt
relief.

According to the government’s website the household debt will be
reduced by 13 percent on average.

Citizens of Iceland have been suffering from debt since the 2008
financial crisis, which led to high borrowing costs after the
collapse of the krona against other currencies.

“Currently, household debt is equivalent to 108 percent of
GDP, which is high by international comparison,” highlighted
a government statement, according to AFP. "The action will
boost household disposable income and encourage savings.”

The government said that the debt relief will begin by mid-2014
and according to estimates the measure is set to cost $1.2
billion in total. It will be spread out over four years.

The financing plan for the program has not yet been laid out.
However, Gunnlaugsson has promised that public finances will not
be put at risk. It was initially proposed that the foreign
creditors of Icelandic banks would pay for the measure.

International organizations have confronted the idea with
criticism. The International Monetary Fund (IMF) and the
Organization for Economic Cooperation and Development (OECD) have
advised against it, citing economic concerns.

Iceland has “little fiscal space for additional household debt
relief” according to the IMF, while the OECD stated that
Iceland should limit its mortgage relief to low-income
households.

In the meantime, ratings service, Standard & Poor's, cut back
on its outlook for Iceland's long-term credit rating to negative
from stable, stating that the economic measure could affect the
confidence of foreign investors if it ends up being paid for by
the existing creditors of Icelandic banks.